Is Chapter 13 Prepayment a Good Idea?
Making payments for your Chapter 13 bankruptcy plan can seem like a long journey – repayment plans for this type of bankruptcy can take three to five years.
If you have a windfall like an inheritance, lottery winnings, or a big bonus at work, you might be thinking about paying Chapter 13 sooner. Before making a lump sum payment to get out of Chapter 13 bankruptcy, be aware of the repercussions of a prepayment.
Do I have to pay for my Chapter 13 plan early?
In most cases, paying for Chapter 13 early is not a good idea. By paying off Chapter 13 early, you are required to pay off 100% of the debt you owe your creditors instead of the reduced amount.
When you file your Chapter 13 case, you and your bankruptcy trustee or attorney decide a reasonable amount of debt – usually less than what you actually owe – that you might be able to pay off your creditors.
For example, instead of paying off 100% of the debt included in your bankruptcy application, the court might only require payment of 70% under the plan. This amount is based on your assets, monthly income, and monthly expenses. Once you complete your Chapter 13 repayment plan, the remaining 30 percent of your debt is discharged, meaning you won’t have to pay off that remaining debt.
If you pay off your Chapter 13 plan earlier, you are changing the agreed terms of your bankruptcy case. Now you will be responsible for paying your creditors all of your original unpaid debt, including the amount that would have been paid.
The reasoning is simple: if you can afford to make a lump sum payment on the plan, you should be able to continue making monthly payments until the remaining balances are paid as well.
How to pay for your Chapter 13 plan early in 4 steps
If Chapter 13 prepayment is still your goal, here are four steps you can take.
1. Confirm that your finances are secure
It can be tempting to devote all of your windfall to your bankruptcy repayment plan to finally get rid of debt. While it is possible to spend a large amount of money on Chapter 13 prepayment, be careful.
Make sure other areas of your finances are stable. This includes having enough money for essential expenses such as housing, food, and utility bills.
2. Request early repayment from creditors
Paying off Chapter 13 bankruptcy quickly doesn’t just mean giving your bankruptcy trustee a lump sum to close your case. First, you will need to formally request a prepayment from all of your creditors and get the court to approve the request.
From there, creditors can accept or reject your claim. In most situations, creditors will object to you paying off Chapter 13 bankruptcy sooner because it goes against the repayment plan.
3. Wait for the court’s decision
If the court decides in favor of your creditors to deny an early repayment – which is common – your monthly payment may be affected. The amount of your monthly Chapter 13 payment is in part determined by your discretionary income.
Increased income, along with unchanged costs for approved essentials, means your additional funds are considered discretionary income. In this situation, the court may increase your monthly payments under the plan.
4. Pay off all of your initial debt
If your Chapter 13 prepayment request is approved by a court, you will need to pay 100% of the debts on your bankruptcy case. This includes unsecured debts, such as credit cards, that would have been discharged had you continued to make Chapter 13 plan payments on the original schedule.
Final Considerations When Paying For Your Chapter 13 Plan
When considering whether Chapter 13 prepayment is right for you, remember that a bankruptcy case still remains in your credit history for seven years from the date you file. Prepayment won’t clean up your credit slate sooner.
There are only a few exceptions when Chapter 13 prepayment will not result in a higher amount of debt, but your attorney or the trustee assigned to your case will need to find out if there is one in your bankruptcy district. But more likely than not, you need to stay the course and keep making payments for the rest of your plan if you don’t want to risk increasing your monthly Chapter 13 payment amounts.